middleclass

Feeling the PRD pulse
Special Report: Shop Talk – China, ASEAN and robotics
Automation is the more common
corporate response; relocation has
been more prevalent among lowend
manufacturers
The need for cost savings to be
large enough to offset the potential
loss in efficiency and other risks is
probably the main reason only a
minority still favours moving inland
To invest or relocate, that is the question
PRD manufacturers are responding to the prevailing challenges. We have long
argued that a labour shortage and wage pressures can be positive for an economy if
they force the right behavioural changes at the micro level. Companies willing to
invest in improving their cost structure and competitiveness can benefit from new
opportunities. The economy in turn gets a much-needed productivity boost, and the
creation of high-end jobs helps absorb an increasingly educated workforce. It is,
therefore, encouraging to know that investing more in automation and streamlining
processes continues to be the preferred response to labour-shortage and wage
pressures, cited by 48% of our PRD survey respondents (Figure 22).
Our respondents are marginally less enthusiastic about investing more in capital
equipment and in moving capacity inland compared with a year ago. 17% said they
plan to move capacity inland, down from 20% last year and 28% in 2014. Outer
Guangdong gets the most votes as the preferred destination under this option,
reflecting respondents’ preference to stay close to their existing PRD operations
(Figure 25). When asked what the advantages are for moving to their choice of inland
provinces, ‘better labour supply’ comes out on top, reinforcing how the PRD’s
persistent labour shortage and wage increases continue to force the hand of
manufacturers (Figure 23). The fact that the second and third top choices are also
cost-related confirms the pressure on margins. The main concerns in moving
factories inland are under-development of transport and infrastructure, and poor
labour productivity and quality (Figure 26); the need for cost savings to be large
enough to offset potential loss in efficiency and other risks is probably the main
reason only a minority still favours moving inland.
Manufacturers who prefer to move production overseas are also a minority. 13% of
respondents chose this option, with Vietnam and Cambodia once again the most
favoured destinations as in prior years (Figure 24). We believe these choices indicate
that companies considering relocating from China are mostly low-end producers in
sectors such as textiles and garments. These top overseas destinations also happen
to offer the biggest advantage over the PRD in terms of better labour supply; in
contrast, their economic outlook, proximity to new buyers and potential free trade
agreement (FTA)-related benefits do not seem to be significant influences. Underdeveloped
transport and infrastructure are once again top concerns for Vietnam and
Cambodia, while uncertain political/social outlooks and undeveloped legal systems
Figure 22: How do you respond to labour shortages?
% of respondents, this and past surveys
Figure 23: Advantages for relocating to choice destination
No. of respondents
Invest more in automation/
streamlining processes*
Better labour supply
(quantity/quality)
Attractive tax incentives
Invest more in
capital equipment
Move capacity
inland
Move capacity
out of China
2016
2015
2014
2013
Other savings on non-wage
business costs
Better economic outlook
Proximity to new buyers
and customers
FTA-related benefits (e.g.
TPP, RCEP)
Local housing policy
Moving overseas
Moving inland
0% 10% 20% 30% 40% 50% 60% 70%
0 10 20 30
* Not an answer option before 2015; Source: Standard Chartered Research Source: Standard Chartered Research
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